Emerging market elections; market-pleasing results in three countries

21
December
2017

By Eerdmans, Co-Head of Emerging Market Fixed Income

As we have mentioned before, emerging markets (EMs) are at the start of a busy election calendar over the next 12-18 months. Election outcomes can be crucial in driving policy direction and therefore asset prices. This past weekend we had the first three of these EM elections, and all resulted in the more market friendly outcome. In the case of South Africa, this wasn’t straightforward but Ramaphosa’s victory represents a transformational moment for this young democracy and its people.

Modi passes local election test

Let’s start with the least market-moving election, the local elections in two Indian states, Gujarat and Himachal Pradesh. While of limited economic impact, the elections were an important litmus test of Prime Minister Modi’s popularity and reform agenda, particularly important given the next general election is less than 18 months away. It was an encouraging victory for this party, which secured majorities in both states. Admittedly the size of the majority in Gujarat was a bit disappointing, although the BJP recorded a better than expected result in Himachal Pradesh. Overall we see the result as a positive one for the BJP, with the current trajectory of reforms likely to stay in place.

Pinera returns to the helm in Chile

Meanwhile in Chile, pro-business ex-President Sebastien Pinera was elected after the second round of the Presidential Election. After a tighter than expected first round (which spooked the markets), Pinera easily defeated the leftist Guillier, with a projected 55% share of the vote. During four years of Bachelet, the reform agenda stalled and more populist policies were adopted. Thus the business-friendly Pinera should ensure a more pro-reform agenda in the coming years. This resulted in the Chilean peso being one of the strongest EM currencies this month, up 4.5% (at the time of writing). We remain constructive on Chile and believe we can see positive reforms, improved business sentiment and a pick-up in growth after a few disappointing years.

Ramaphosa’s victory brings new hope for South Africa

The most hotly contested and arguably most important election this weekend was not a public one, but the internal election for the ANC Presidency. The election polarised the ANC and indeed the country with Nkosazana Dlamini Zuma (NDZ) representing the under-fire Zuma faction, which is accused of blatant corruption and weak economic and fiscal policies, versus the more market-friendly candidate Cyril Ramaphosa. The policy differences between the two candidates meant the market viewed the outcome as binary, with a Ramaphosa win representing a return to the days of prudent macro policy and a NDZ victory symbolising a continuation of institutional decline.

As the market gained greater confidence of Ramaphosa’s victory, the rand rallied (by over 6% this month at the time of writing). Ultimately, internal divisions meant that a compromise result was inevitable. As such, despite Mr Ramaphosa taking the ANC presidency (and likely South Africa’s presidency in the next national election) the top-6 party positions were split 3-3 across the factions, with at least two deeply compromised people (David Mabuza and Ace Magashule) taking senior positions. This highlights the need for caution, and clearly we also need to see how quickly Ramaphosa’s victory translates into better policy as he balances the demands of both the nation and the ANC itself. But overall, this result is a positive for South Africa’s future.

All in all, these three results were encouraging. This may well set the scene for further positive outcomes in the busy 2018 election cycle. This combined with a strong economic growth outlook and relatively attractive valuations, should bode well for Emerging Market Debt returns in the New Year.

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